Most EU industries are to face “hardly any carbon costs” over 2020-2030 due to extensive free allocations of carbon allowances and their ability to pass on costs to their customers, according to a leaked draft European Commission document.
That is largely regardless of which of the six options the Commission is considering to determine the free allocations, according to an undated draft impact assessment of the EU ETS review posted on the website of environmental campaigners Change Partnership on Wednesday.
That document is likely to be revised as a Commission review board has asked for a new version to be submitted, a separate document showed. The Commission is aiming to publish the full proposal by August, it will need approval from EU lawmakers in a process that could take at least two years.
The review will govern post-2020 rules such as deepening the annual ETS cap reduction to 2.2% from the current 1.74% rate, as well as determining rules for allocating free allowances to industries deemed vulnerable to carbon leakage.
“For many sectors and some option packages, it can be expected, that hardly any carbon costs have to be absorbed by the operators of installations. There may even be a risk that the compliance costs are more than fully alleviated and windfall profits are generated in some cases,” the document said (p.44 of the annexes).
It said that on a sectoral level, in most cases free allowances are estimated to cover the majority of project emissions and sizeable cost pass-through rates significantly reduce the total compliance costs.
The document listed the impacts for several industries:
- Cement: free allocation is expected to cover the majority of the sector’s emissions under all four options.
- Steel: free allocation is expected to cover at least some three quarters of the sector’s emissions eligible for free allocation… under all four packages.
- Refineries: free allocation is expected to cover at least some two-thirds of the sector’s emissions under all four packages.
- Chemicals: Varies according to method used, could be high or very high leakage risk (resulting in considerable free allocation)
- Fertilizers: Free allocation is expected to cover at least some three-quarters of the sector’s emissions under all four packages.
Current rules allocate to industries the vast amount of their required carbon allowances for free but the Commission is considering various ways to changing how the units are given out.
As previously reported on Carbon Pulse, one option includes staggering the allocation, with lower amounts of free allowances awarded to sectors deemed more vulnerable to carbon leakage.
This would give 100% to a group of related industrial sectors deemed more vulnerable, and 80%, 60% and 30% to other sectors that are found to be at less of a carbon leakage risk.
DISMISSES DYNAMIC ALLOCATION
The Commission was dismissive of so-called dynamic allocation of free carbon allowances, which have been favoured by some industry groups and nations including Poland and the Netherlands.
The executive said in the document that such an approach would significantly undermine the incentive to reduce emissions in some sectors by directly penalising some installations taking action by allocating them fewer allowances.
It added that the required increase to data collection would put too heavy an administrative burden on regulators and operators, as well as putting a “significant constraint” on the business confidentiality of data.
“A full ex-post dynamic allocation free allocation system does not seem realistic and able to address the concerns expressed by industrial stakeholders,” it said.
“An ex-ante system with more frequent production data adjustments than the current eight-year phase… would be better suited to address the need for stability, predictability and flexibility,”
By Ben Garside – email@example.com